Opinion

Sustainable property

Finance | Jakes Ferguson | 30 Nov 2009

Combating climate change in real estate is an economic opportunity as well as a necessity, says Jakes Ferguson.

The real estate sector offers the biggest potential for reducing energy consumption and preventing greenhouse gas emissions, and therefore can play a key role combating climate change.

Combine this with real estate’s remarkable performance from the market lows (from 9 March global listed real estate is up 78 per cent, 41 per cent ahead of the S&P 500), and many investors are questioning whether they should now be  looking at the sector once again.

In spite of investors being hurt by falls in real estate from 2007, in the long-term, real estate has been a winning asset class. Over ten years to end-September 2009, global real estate is 147 per cent ahead of the S&P 500. The real estate sector is currently producing a healthy yield compared to other asset classes,  and investors’ growing risk appetite combined with the cyclical recovery favour further advances in real estate equities. Furthermore, there are signs that real estate prices are stabilising, and falling credit spreads are improving real estate companies’ access to finance for transactions.

Modern portfolio theory supports investment in real estate, as a way  to gain efficient diversification within a portfolio with its low correlations with broader equities. This way risk can be reduced whilst optimising a portfolio’s risk/return profile. Importantly too, listed real estate funds and REITs bring liquidity and transparency.

Given that real estate is chosen  by many charities, life assurance  and pension funds for long-term investing, how should investors obtain exposure in a socially responsible manner without  being trapped in an illiquid investment vehicle?

This is being answered by a small number of investment managers.  In Germany, HypoVereinsbank’s subsidiary III-Investments has launched the Green Building Fund  to invest in ‘green’ real estate assets. Credit Suisse has launched a Swiss green real estate fund. In the UK Sarasin has launched the first fund investing in market leaders amongst the world’s top listed REITs and  real estate companies screened for sustainability; and Climate Change Capital has launched a fund to invest in sustainable property.

Many believe that a two-tier market may develop with sustainable buildings outperforming and non-compliant buildings being devalued. Lower energy costs mean that  green buildings are preferred  by tenants and achieve above-average rental rates.

So why invest in sustainable real estate? Buildings currently represent 24 per cent of global CO2 emissions (American Institute of Architects, 2008), with an estimated 280 per cent increase in carbon emitted from buildings since the 1950s. According to the OECD’s 2008 International Transport Forum, aircraft travel  only accounts for 11 per cent of  total carbon emissions.The energy required to build,  heat and cool our workplaces and homes is one of the biggest single contributors to greenhouse gases. Buildings represent 40 per cent of global energy consumption –  33 per cent attributable to commercial properties and 67 per cent to residential (World Business Council for Sustainable Development, 2007). Real estate is  a significant greenhouse gas culprit.

The case for sustainability has often been argued purely in financial terms – that in an environment of high energy costs or energy taxes, the long-term operational savings from green buildings outweighs  the cost of their construction. Research suggests the rewards from sustainable buildings are far wider – improving corporate brand, reducing operational risk, and improving staff productivity and retention. Energy efficiency and a reduction carbon footprint are only half the picture.

All these factors have a  positive impact on the value  of sustainable properties.There is growing political pressure to promote a stronger focus on sustainability in construction and building design; and an increasing number of global initiatives introducing certification for energy efficiency of buildings. Real estate developers and owners are expected to make an active contribution  to reducing greenhouse gases.

Charities and other institutional investors have an important role  to play in combining the sound investment rationale alongside the undeniable benefits that responsible real estate investment will bring to the planet.

Jakes Ferguson is a partner at Sarasin and fund manager of Sarasin Sustainable Equity Real Estate Global Fund 

Directory: Sarasin & Partners